Next Generation Supply Management Defined

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Daily Archives: May 20, 2010

That’s right, the International Financial Reporting Standards (IFRS) could be replacing the Generally Accepted Accounting Principles (GAAP) at your US headquarters in as little as four years with the current proposals on the table. And since you have to maintain double books for a year (in GAAP and IFRS) before you switch over, to make sure you have a good handle on the new rules, that means your new IFRS-friendly systems have to be in place in less than three years. Which means your people have to be trained in less than two years … especially since major exams, like the CPA, will start testing on IFRS material in 2012. (And when you consider that the EU has been using IFRS for five years now, and that over 120 countries have already adopted it, it’s about time that North America caught up. Canada catches up next year, and Mexico follows suit in 2012.)

The IFRS has a number of changes in store for supply chain management, including these four outlined in this recent ISM article on the accounting changes ahead:

Last In, First Out

IFRS does not permit inventory to be valued using LIFO. This can have significant tax consequences.

Inventory Valuation

Under IFRS, the inventory valuation you use must reflect current market price.

Long-Term Contracts

Under IFRS, when you take possession of inventory, you take responsibility for it and it must be reported on financial statements.

Management Responsibility

The responsibility of management with respect to data collection and reporting is much greater under IFRS.

The complete overhaul of systems that will be required at many companies could make SOX look like a walk in the park. If you haven’t yet figured out how it’s going to affect your organization, better find an expert sooner rather than later.

In response to whether a CPO would be prepared to be more fluid on quality or on price in order to get that flexibility, Colin Davis said that their organization’s primary goal is going all the way back to the sourcing decision and making sure that they have got everything absolutely aligned to business drivers with the initial contracts and also in the relationship going forward. In response to whether non-retailers get this flexibility to be part of the corporate strategy, Andrew Vaughan said that it comes down to the link with the market, and that if you start with the market from a strategic perspective and work back down, then to my mind it is just about effective communication. And in response to what extent might they be out of the loop if the stakeholders are talking to the suppliers directly, Andrew then said you want your stakeholders to engage because you want to drive innovation. What we try to do is operate cross-functionally so we go together as a team and discuss innovation; we discuss delivery and we discuss quality and costs.

Clearly one of the primary prices of flexible supply chains is strategy, but this is a good thing. Because when you get right down to it, your ultimate success or failure comes right down to your supply chain strategy. If your strategy is to ocean freight high-priced low-volume consumer electronics like laptops, tablets, and cell phones to try and save a few dollars on freight, which is a rather low percentage of the total cost of these items, instead of air freighting them in well-engineered, low-volume, packaging, you’ll not only have difficulty responding to demand changes (when it takes three weeks to restock instead of three days), but lose more in market value than it costs you to ship the products (as most products depreciate in value a couple of percentage points a month).

Furthermore, if your strategy is purely to get the best price today and you overlook the going-forward innovation capabilities of a supplier who could be a strategic partner and who is willing to work with you to take cost out over time, you could not only be giving up 5% year-over-year savings in the future, which the supplier might be willing to commit to because your contract will enable them to purchase more efficient equipment and institute more efficient processes, but a potential source of innovation, integration, and/or inspiration that could be the source of the next big breakthrough in your market … which the supplier might end up taking to an emerging competitor who is willing to look beyond current cost to future value.